Sunoco Worth 53% More in Pieces With Refinery Exit: Real M&A

Sunoco Inc. (SUN), the world’s least profitable owner of refineries under pressure to reward beleaguered shareholders, already has a valuation 53 percent greater broken up or sold in pieces.

Sunoco, which this week said it will sell or shut its last two refineries and explore all options for the company, was the only oil refining and marketing company greater than $1 billion to lose money in the last 12 months, according to data compiled by Bloomberg. Breaking up the company and valuing its operations separately, Philadelphia-based Sunoco may be worth as much as $2.17 billion more, according to Barclays Plc.

The operator of refineries since 1895 has seen profits curbed as steeper costs for Brent crude oil and lower gasoline prices on the U.S. East Coast crimped margins. Still, Sunoco’s 7,600 miles of pipelines may attract Kinder Morgan Inc. and Plains All American Pipeline LP (PAA), according to Morgan Keegan & Co. Once valued at $13 billion, Sunoco may also weigh a spinoff of its 4,900 gas stations, said energy consultancy Muse Stancil.

“When the sum of parts is being overlooked and undervalued, it’s incumbent upon management teams to benefit shareholders to unlock that value,” Todd Lowenstein, who helps oversee $17.2 billion for Highmark Capital Management Inc., said in a telephone interview from Los Angeles. Breakups are “part of an industry trend. Investors have lost interest in unwieldy conglomerates,” he said.

All Options

Sunoco hired Credit Suisse Group AG to conduct a “comprehensive” review of the company to determine how to boost shareholder value, according to a Sept. 6 statement. It also plans to idle the two remaining refineries in Philadelphia and Marcus Hook, Pennsylvania, if buyers can’t be found for the unit that lost money in eight of the last 10 quarters.

All options are on the table, including a sale of the whole company, converting to a master-limited partnership or buying pipelines, storage and retail fuel assets to expand in those businesses, Chairman and Chief Executive Officer Lynn Elsenhans said on the Sept. 6 conference call.

“With the exit from refining, the company is undergoing a fundamental change that presents an opportunity to take a fresh look at all aspects of our business,” Thomas Golembeski, a spokesman for Sunoco, said in an e-mail. “We will consider all possible options to determine the best next steps.”

Companies from ConocoPhillips (COP) to Marathon Oil Corp. (MRO) and Chevron Corp. (CVX) have been trimming refining holdings to focus on offshore oil drilling and North American crude production.

Only Unprofitable Refiner

Since its market value peaked at $13.1 billion in January 2006, Sunoco shares declined 61 percent to $37.56 through yesterday as profits shrank and the company began to shed assets. The Standard & Poor’s 500 Energy Index rose 16 percent in the same period, the data show.

Sunoco rose as much as 2.8 percent in New York today before ending trading down 1.2 percent at $37.12. That was the best performance of any energy company in the S&P 500, as the broader index tumbled 2.7 percent.

Sunoco lost $74 million during the last 12 months, the only unprofitable firm among 44 companies with market values greater than $1 billion in the oil refining and marketing industry worldwide, data compiled by Bloomberg show.

Formerly known as the Sun Oil Co. of Ohio, Sunoco started operating its first refinery 116 years ago, according to its website. In the past year, the company has already been paring back assets with the spinoff of its metallurgical coke-producing unit and the sale of two refineries and its chemicals business.

Sum of Parts

A sum-of-the-parts analysis by Paul Cheng, an analyst at Barclays in New York, shows Sunoco is worth between $48 a share and $58 a share. That would give it a combined equity value of $5.18 billion to $6.23 billion, as much as 53 percent more than the market capitalization yesterday.

Cheng based the projections on 2012 estimates for earnings before interest, taxes, depreciation and amortization at each of Sunoco’s units and applying earnings multiples for comparable companies. The analysis includes the potential sale of the refining business for $400 million to $1 billion.

Sunoco’s “sum-of-the-parts far exceeds its current market valuation,” Cheng wrote in the Sept. 6 report. “This string of announcements provides evidence of management’s dedication to unlocking shareholder value by breaking apart the weaker businesses.”

According to Macquarie Group Ltd.’s analysis that assumes a shutdown of the refinery business and liquidation of the inventory, Sunoco’s businesses may be worth $44 a share to $49.30 a share. The estimate from Chi Chow, a Denver-based analyst at Macquarie, in a Sept. 7 report, would be 17 percent to 31 percent more than the market value yesterday.

Oil Pipelines

Plains All American and Kinder Morgan may be interested in Sunoco’s oil and refined product pipelines, John Edwards, an analyst at Morgan Keegan in Houston, said in a phone interview. Sunoco owns a 31 percent interest in Sunoco Logistics Partners LP (SXL), a publicly traded partnership with typically fixed contracts for its pipelines and storage tanks concentrated in the U.S. Northeast, Midwest and South Central regions.

“It would create a presence in the Northeast for Plains,” Edwards said. “The footprints match up.”

Kinder Morgan’s Plantation pipeline system moves refined products to the East Coast from the Gulf, and Sunoco could provide additional access, he said.

Roy Lamoreaux, a spokesman for Plains All American in Houston, didn’t return a phone call seeking comment. Larry Pierce, a spokesman for Houston-based Kinder Morgan, declined to comment.

Coke for Steel

Sunoco also owns 81 percent of SunCoke Energy Inc., which it spun off in July. The stake in the biggest independent metallurgical coke producer in the Americas may draw interest from ArcelorMittal (MT) and AK Steel Holding Corp. (AKS), Arun Viswanathan, an analyst with Susquehanna International Group LLP in New York, said in a phone interview.

Large steelmakers without their own supply of metallurgical coke, used as fuel to make steel, may be interested in such a producer, Viswanathan said.

Alan McCoy, a spokesman for AK Steel, declined to comment on potential acquisitions. Representatives for ArcelorMittal didn’t respond to an e-mail requesting comment.

Sunoco could split off its gas stations as it did with SunCoke, Neil Earnest, vice president at Dallas-based consultancy Muse Stancil, said in a phone interview. Stand-alone retail store owners such as Pantry Inc. (PTRY) or closely held QuikTrip may then be potential buyers, he said.

Brandon Bryce, a spokesman for Pantry, owner of Kangaroo Express convenience stores, didn’t respond to an e-mail seeking comment. Mike Thornbrugh, a spokesman for QuikTrip, said the company is not interested in Sunoco’s stores.

No Refinery Buyers

Sunoco may not find a buyer for its refineries, which together can process 505,000 barrels a day of crude, Macquarie’s Chow wrote in the report.

Refineries on the East Coast have struggled to turn a profit due to the higher prices they pay for crude, depressed U.S. demand and competitive gasoline prices in the East Coast market, Skip York, vice president for downstream oil in Houston for consultancy Wood Mackenzie, said in a phone interview.

The company’s two plants process costlier imported oil with prices linked to Brent crude production in the U.K.’s North Sea. The difference between what Sunoco pays for a Brent barrel and the benchmark for what inland refiners pay has averaged $15.26 this year, according to Bloomberg data. Sunoco’s refineries also face competition from Europe, which is exporting excess gas, York said.

‘Business Is Tough’

Sunoco would reap $200 million after taxes from shuttering the refineries, selling petroleum products inventory, unwinding derivatives contracts and other expenses, CEO Elsenhans said at a conference in New York yesterday.

“The refining business is tough, to say the least,” Mark Demos, a fund manager who helps oversee about $18 billion for Fifth Third Asset Management in Minneapolis, said in a phone interview. “Sunoco may be seeing that if there’s a time to get rid of these assets, it’s probably now.”

Selling or closing the last of its refineries may put the whole company in play, Tim Ghriskey, who oversees $2 billion as chief investment officer of Bedford Hills, New York-based Solaris Group LLC, said in a phone interview.

“They’re getting out of the cyclical, dirty, environmentally challenged, often money-losing part of the business,” Ghriskey said. “Certainly a full breakup or sale of the company might evolve during the process of selling the refining business.”

To contact the reporters on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editor responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Susan Warren at susanwarren@bloomberg.net.

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